You are about to apply for a mortgage to finance your new home purchase. Then the question comes up. Should I get a mortgage loan with ZERO points... (called a "par" rate loan) or should I pay extra points up front... to get a lower interest rate... so my payments will be lower ?

That's the question ! So... what's the best answer ?

The answer for this... is pretty much the same as the answer to many questions.

It Depends !

If you are considering paying extra money... by paying extra "points" as part of your closing costs... (a "point" is one percent of the mortgage amount)... then here is what you need to decide.

How long... how many years... do you think you will be in your home before you sell it ?

Paying points... and buying down the interest rate ONLY makes sense if you are going to be in the home long enough so that the amount you save on your MONTHLY payment ends up EXCEEDING the amount you paid in points.

In general... if you pay points... and are in your home for less than five years and eight months... you lose money.

If you pay points to lower the interest rate... and you are in your home LONGER than five years and eight months... you end up ahead of the game... because the total of the money you saved on your monthly payments... exceeds the original cost of the points.

If you pay points up-front... and then end up moving in three years... half of that up-front money ends up wasted... because you have spent more on the points than you have saved in your three years of lower monthly payments.

Also... don't forget about the possibility of you deciding to refinance. If you pay points for a lower rate at time of purchase... and then the rates drop, and you decide to refinance... the same thing happens. You have wasted the up-front money you paid for points for the lower rate... because refinancing ends the lower monthly payments you ended up with... when you paid the points originally.

My advice to buyers... in general... is to keep your money you'd pay for points... in the bank. Or... depending on your situation... use it to pay off a high-interest credit card. Or... pay your car off. Save a bunch that way.